Saturday, February 28, 2009

Same bank execs who led collapse, now manage bailout - (www.insidebayarea.com) It's one of the ironies of the U.S. financial bailout: The banking executives now managing billions in taxpayer money are the same ones who oversaw the industry's near collapse. At banks receiving federal bailout money, nearly nine of every 10 of the most senior executives from 2006 are still on the job, according to an Associated Press analysis of regulatory and company documents. Even top executives whose banks made such risky loans they imperiled the economy have been largely spared any threat to their jobs. Less fortunate are more than 100,000 bank employees laid off during a two-year stretch when industry unemployment nearly tripled, bank stocks plummeted and credit dried up. "The same people at the top are still there, the same people who made the decisions causing a lot of our financial crisis," said Rebecca Trevino of Louisville, Ky., a mother of three who was laid off from her job as a Bank of America training coordinator in October. "But that's what tends to happen in leadership. The people at the top, there's always some other place to lay blame." It's hardly a surprise that workers and managers experience a recession differently. What's new is that taxpayers are now shareholders in the nation's bailed-out banks, yet they lack the usual shareholder power to question management decisions or demand house-cleaning in the executive suites. Wells Fargo & Co., for example, once was among the top lenders for subprime mortgages, loans to buyers with low credit scores. The company received $25 billion in bailout money and plans layoffs in the coming months. But longtime CEO Richard Kovacevich remains the company's chairman, and the board recently waived its mandatory retirement age for him. "Our senior leadership team of our CEO and his direct reports have an average tenure of almost a quarter-century with our company," Wells Fargo spokeswoman Julia Tunis Bernard said in a statement that also highlighted the company's "unchanging vision." Under the government's bailout plan, taxpayers must take it on faith that bank executives will make better decisions this time around, said Jamie Court, president of the California-based group Consumer Watchdog. "When you deal with the same dogs, you're going to end up with the same fleas," said Court.

Germany, France May Face Bailout of Nations, Not Just Banks - (www.bloomberg.com) - German Finance Minister Peer Steinbrueck became the first senior policy maker to broach the topic this week, saying some of the 16 euro nations are “getting into difficulties” and may need help. French officials are also concerned about market tensions as the cost of insuring Irish, Greek and Spanish debt against default rises to records and bond spreads widen. The nightmare for Angela Merkel and Nicolas Sarkozy is that widening deficits will prompt investors to shun the debt of some countries, sparking a region-wide crisis. While few investors are yet forecasting any defaults, the mere risk of it may prompt the bloc’s two richest economies to ignore the European Central Bank and announce their willingness to come to the rescue.

California budget includes tax relief for film, TV shoots - (www.latimes.com) Gov. Arnold Schwarzenegger, a former movie actor, has been trying for years to get tax credits to keep California's signature industry at home. He got his wish early Thursday when the Legislature approved tax credits for film and television productions as part of an economic stimulus provision of the new state budget. The credits -- capped at $500 million over five years -- are modest compared with those offered by other states. Still, the announcement was welcome news to many in Hollywood who were skeptical that the Legislature would help the entertainment industry given the enormousness of the task of plugging the state's $42-billion budget gap. "We applaud the passage of this incentive, which will help make California competitive and not only save jobs that are being lost but generate much-needed revenue for the state," said a joint statement from Hollywood's actors and directors unions and the Motion Picture Assn. of America, which have been lobbying for the credits for a decade. Previous attempts by Schwarzenegger to secure such credits have been torpedoed by lawmakers who viewed them as a handout to Hollywood. But those arguments weakened amid mounting evidence that other states were poaching jobs from Southern California. More than 30 states now offer tax credits and rebates to lure production crews to their locales. New York, New Mexico, Louisiana and Michigan have seen a surge in production and jobs since implementing incentive programs, contributing to historic lows in L.A. shoots. "So much has disappeared, anything we bring back will be a boon," said Paul Audley, president of FilmL.A., which processes filming permits.

The RAT hiding deep inside the stimulus bill - (www.dcexaminer.com) You’ve heard a lot about the astonishing spending in the $787 billion economic stimulus bill, signed into law this week by President Barack Obama. But you probably haven’t heard about a provision in the bill that threatens to politicize the way allegations of fraud and corruption are investigated — or not investigated — throughout the federal government. Photographers take pictures of the economic stimulus bill after President Barack Obama signed the document during a ceremony at the Denver Museum of Nature and Science in Denver, Tuesday, Feb. 17, 2009. (AP Photo/Gerald Herbert) The provision, which attracted virtually no attention in the debate over the 1,073-page stimulus bill, creates something called the Recovery Accountability and Transparency Board — the RAT Board, as it’s known by the few insiders who are aware of it. The board would oversee the in-house watchdogs, known as inspectors general, whose job is to independently investigate allegations of wrongdoing at various federal agencies, without fear of interference by political appointees or the White House. In the name of accountability and transparency, Congress has given the RAT Board the authority to ask “that an inspector general conduct or refrain from conducting an audit or investigation.” If the inspector general doesn’t want to follow the wishes of the RAT Board, he’ll have to write a report explaining his decision to the board, as well as to the head of his agency (from whom he is supposedly independent) and to Congress. In the end, a determined inspector general can probably get his way, but only after jumping through bureaucratic hoops that will inevitably make him hesitate to go forward. When Iowa Republican Sen. Charles Grassley, a longtime champion of inspectors general, read the words “conduct or refrain from conducting,” alarm bells went off. The language means that the board — whose chairman will be appointed by the president — can reach deep inside a federal agency and tell an inspector general to lay off some particularly sensitive subject. Or, conversely, it can tell the inspector general to go after a tempting political target.

Obama's Accounting Gimmick to Protect Lenders - (optionarmageddon.ml-implode.com) Bush’s strategy for dealing with the banking and housing crises was to bury his head in the sand, Obama’s strategy has been to bury his head even deeper. The housing crisis, like the banking crisis, isn’t going to be “solved” until asset prices are allowed to fall. The Bush administrations, in concert with the Fed, had a simple strategy: throw good money after bad in order to prop up asset prices, protecting failed homedebtors and bankers from absorbing their losses. Obama has simply doubled-down on the same strategies. Literally. The key part of Obama’s housing plan announced yesterday is to subsidize mortgage payments, reducing effective interest costs in order to put a floor under asset prices so banks and homeowners don’t have to declare bankruptcy. Naturally banks love the Obama plan. By subsidizing monthly payments, and not forcing banks to write down principal by more than a token amount of $1000 per year for 5 years, the plan will keep homedebtors tethered to vastly overpriced mortgages. Who does this really benefit? Not the homedebtor, who has little chance of ever building equity in the home. He’s effectively paying over-priced rent to a bank. No, the banks are the real beneficiaries.

Who are these 'responsible' houseowners? - (www.sfgate.com) President Obama's housing plan is designed to save "responsible" homeowners from foreclosure by having taxpayers subsidize their mortgage payments. The problem is, how do you define "responsible?" In his speech, Obama said his plan "will not help speculators who took risky bets on a rising market and bought homes not to live in but to sell. And it will not reward folks who bought homes they knew from the beginning they would never be able to afford." It should be fairly easy to identify speculators who bought homes to rent or flip. But how do you prove someone bought a home they knew they couldn't afford? I've spoken with many people who can't pay their mortgages and are desperate for help. All bought homes they thought they could afford and in many cases really could afford. Most got into trouble by refinancing their homes - often more than once - and extracting every possible dollar of equity. The money went toward granite countertops, stainless steel appliances, credit cards, student loans, vacations, weddings, cars, etc. Then came a job loss or a divorce or the roommate moved out, and suddenly they couldn't make the payment. They tried to sell or refinance but couldn't because the home's value had dropped below the loan balance. Responsible or reckless? Who's to say? Obama announced two new plans for "responsible" homeowners who want to reduce their mortgage payments. Neither excludes people who cashed out their equity. Both are open only to people whose mortgages are owned or guaranteed by Fannie Mae and Freddie Mac, which essentially have become arms of the government.

Housing relief becomes a fence between neighbors - (www.latimes.com) Ledeen Halloran and Harry Snegg live a few houses apart on Claiborne Drive in Long Beach. They both have good jobs, they both voted for John McCain -- and they both have seen their home values fall more than 40%. But when it comes to their views on mortgage relief, these two neighbors are on different sides of the street. Halloran, 50, is a fan of President Obama's new plan to stave off foreclosures and thinks it could provide the cushion she needs to stay in her home. "These bad mortgages started this whole recession, and if they don't do something about it we can't turn things around," she said. Snegg, 62, thinks the $75-billion plan amounts to a taxpayer-funded bailout for people who either couldn't manage their money or took a gamble to score easy winnings in the real estate boom. "People should get some help, but I don't think I should have to pay for it," Snegg said. Halloran and Snegg represent a debate that is happening across the country, although the two neighbors say they mostly keep their views to themselves. Snegg, who is divorced, worries that talking too negatively about people who are hurting isn't very neighborly. Halloran, also divorced, said she hadn't told her mother or her friends that she was having trouble with her mortgage. Halloran moved into the Bixby Knolls neighborhood of 1940s-era homes in 1996. In 2006, she was thinking about selling and moving to the East Coast, to be closer to her son's college. So she refinanced her 30-year fixed-rate mortgage, shifting to an adjustable rate loan and tapping some of her equity to pay for renovations. A few months later, she borrowed against her house again to pay for more home upgrades and to cover her son's tuition. There was one hitch, however: Her loan had an option that allowed her to pay the interest only, but when she did, the unpaid principal was added to her balance. Now her mortgage exceeds the value of her home by about $150,000, and her $3,400-a-month payment is more than an entire two-week paycheck.

Friday, February 27, 2009

Housing Downturn Moves Into Phase II - (www.newgeography.com) The great housing turndown, which started as early as 2007, has entered a second and more difficult phase. We can trace this to Monday, September 15, 2008 just as October 29, 1929 – “Black Tuesday” – marked the start of the Great Depression. September 15 does not yet have a name and the name “Black Monday” has already been taken by the 1987 stock market crash. The 1987 crash looks in historical perspective like a slight downturn compared to what the world faces today. On September 15 – let’s call it “Meltdown Monday” – the housing downturn ended its Phase I and burst into financial markets leading to the most serious global recession since the Great Depression. Indeed, International Monetary Fund head Dominique Strauss-Kahn now classifies it a depression. Phase I claimed its own share of victims; Phase II seems likely to hit many more. Phase II of the Housing Downturn: The Panic of 2008: By September 15, the “die had been cast.” The holders of mortgage debt could no longer sustain the losses that were occurring in the ground zero markets. This led to the Lehman Brothers bankruptcy and then to a financial sector that seems to be accelerating faster than the taxpayers can pick up the pieces. The ensuing “panic” – a 19th century synonym for a severe economic downturn – has led to millions of layoffs, decreases in demand across the economy and taxpayer financed bailouts around the world. Many have seen their retirement funds wiped out. Others have lost their jobs. American icons, such as General Motors and Bank of America have been relegated to begging on Washington’s K Street. Housing Downturn Broadens and Deepens: The panic has now brought about a new phase in the housing downturn – what I label Phase II. In Phase II, a deteriorating economy starts to kick the bottom out of the rest of the housing market. With evaporating confidence in the economy and the drying up of demand, house prices have begun a free-fall in virtually all markets, regardless of the extent to which their prices had bloated.

The Insolvency of the Fed - (www.mises.org) Yet, has the Fed really "run out of ammunition"? First of all: what is the Fed shooting at? It is trying to artificially stimulate the economy with its monetary policy, thereby it is also unwittingly shooting at the value of the currency. Through its monetary policy, the Fed is trying to bail out an insolvent and illiquid banking system to maintain an unsustainable structure of production. As long as the currency is not totally destroyed, the Fed will never run out of ammunition. In order to assess the ammunition left, one should have a look at the balance sheet of the Federal Reserve — especially at the assets the Fed can still obtain. The Fed's balance sheet also gives insights on the condition or quality of the dollar. Since the crisis broke out, the Fed has continuously weakened the quality of the dollar by weakening its balance sheet. In fact, the assets the Federal Reserve holds have deteriorated tremendously. These assets back the liability side of the balance sheet, which mainly represents the monetary base of the dollar. The assets of the Fed, thereby, hold up the value of the dollar. At the end of the day, it is these assets that the Fed can use to defend the dollar's value externally and internally. Thus, for example, it could sell its foreign exchange reserves to buy back dollars, reducing the amount of dollars outstanding. From the point of view of the buyer of the foreign exchange reserves, this transaction is a de facto redemption. In the first stage of the crisis that lasted until September 2008, the Federal Reserve did not increase its balance sheet. Instead, the Fed changed its balance sheet's structure. These changes are very important for the value of the currency. Imagine that the Fed announces tomorrow that is has sold all its gold and has bought Zimbabwean government bonds with the revenues. The Fed would explain this move by arguing that the stability of the Zimbabwean economy would be crucial for the US economy and the welfare of mankind. This action by itself would not change the quantity of money at all, which shows that concentrating exclusively on the quantity of money is not sufficient to evaluate the condition of a currency. Qualitative issues can be even more important than mere quantities. In fact, an asset swap from gold to Zimbabwean government bonds would mean a strong deterioration of the quality of the dollar

Walking away could save debtors a lot of money - (www.nytimes.com) In a speech in Phoenix, a signature real estate boomtown gone bust, President Obama will explain his plan to reduce foreclosures. And the key to understanding that plan will be remembering that there are two different groups of homeowners who are at risk of foreclosure. The first group is made up of people who cannot afford their mortgages and have fallen behind on their monthly payments. Many took out loans they were never going to be able to afford, while others have since lost their jobs. About three million households — and rising — fall into this category. Without help, they will lose their homes. The second group is far larger. It is made up of the more than 10 million households that can afford their monthly payments but whose houses are worth less than what is owed on their mortgages. In real estate parlance, they are underwater. If they want to stay in their homes, they will have no trouble doing so. But some may choose to walk away voluntarily, rather than continue to make payments on an investment that may never pay off. Scratch beneath the details of any housing bailout proposal, and the fundamental issue is whether it tries to help the second group or just the first. Mr. Obama has evidently decided to focus on the first group, based on the previews of his speech that aides have offered. In coming weeks, his administration will begin spending $50 billion to entice banks to reduce the monthly payments of people who otherwise couldn’t afford to stay in their houses. In effect, the government will split the losses on these mortgages with banks. The $50 billion will come from the money Congress has already allocated for the bailout of the financial system. It is likely to be aimed at people who need a significant, but not an enormous, amount of help to meet their mortgage payments. There are some big advantages to this approach. Bailing out all underwater homeowners would be tremendously expensive. All told, about $500 billion in mortgage debt is already underwater, and it’s impossible to know in advance who is likely to walk away. So the government would have to spend hundreds of billions of dollars to help millions of people who don’t need help staying in their homes. But the Obama approach also brings risks. The administration is betting that few of those 10 million underwater homeowners will walk away. (A year from now, the number will about 15 million, Moody’sEconomy.com projects.) If they begin to abandon their homes in large numbers, however, they will aggravate the housing bust and the financial crisis — and probably force the administration to come up with a new, much larger housing bailout down the road.

Banned by Zippy Realtors - (paper-money.blogspot.com) Somewhat funny story showing the power that realtors who control the MLS have. When the user replied to the site that the housing market was still very soft and sales were non-existent, they banned him from the site.

New foreclosure defense: Prove I owe you - (msnbc.msn.com) Persuading a judge to compel production of hard-to-find or nonexistent documents can, at the very least, delay foreclosure, buying the homeowner some time and turning up the pressure on the lender to renegotiate the mortgage. "I'm going to hang on for dear life until they can prove to me it belongs to them," said Lovelace, a 50-year-old divorced mother who owns a $200,000 home in Zephyrhills, near Tampa. "I'll try everything I can because it's all I have left." In interviews with The Associated Press, lawyers, homeowners and advocates outlined the produce-the-note strategy. Exactly how many homeowners have employed it is unknown. Nor is it clear how successful it has been; some judges are more sympathetic than others. More than 2.3 million homeowners faced foreclosure proceedings last year and millions more are in danger of losing their homes. On Wednesday, President Obama will unveil a plan to spend at least $50 billion to help homeowners fend off foreclosure. Chris Hoyer, a Tampa lawyer whose Consumer Warning Network Web site offers the free court documents Lovelace used to file her request, has played a major role in promoting the produce-the-note strategy. "We knew early on that the only relief that would ever come to people would be to the people who were in their houses," Hoyer said. "Nobody was going to fashion any relief for people who have already lost their houses. So your only hope was to hang on any way you could."

It May Cost Taxpayers Less to Let GM Fail - (www.cnbc.com) Obama's housing plan is bound to rile the Republicans, says Joe Magyer, senior analyst at The Motley Fool. He also tells CNBC's Martin Soong & Amanda Drury that it may actually cost the U.S. taxpayers less, to allow GM to go bankrupt then the automaker alleges.

Venezuela Takes Over Local Stanford Bank - (www.cnbc.com) Venezuela took control of a local bank owned by Allen Stanford, who faces U.S. fraud charges, the finance minister said on Thursday, as the impact of the American case spread through Latin America."We have taken the decision to take over," Finance Minister Ali Rodriguez said, adding that the government would seek to quickly sell the bank. In recent days, depositors had worried that the trouble at Stanford International Bank would hurt Stanford Bank Venezuela and had withdrawn cash from the small local bank even though the companies' assets are separate, industry officials and bank customers said. Industry officials have said the fall of one of the smallest retail banks in Venezuela, which only takes deposits and makes loans in local currency, was unlikely to cause much of a disturbance in the rest of the sector.

California budget deadlock broken - Assembly quickly follows Senate and OKs spending plan to end crisis. GOP Sen. Abel Maldonado of Santa Maria changes his vote to end the impasse. In exchange, Democrats agree to his demand to rewrite election rules. The plan includes billions of dollars in tax increases. GOP Sen. Abel Maldonado's vote broke the deadlock. In exchange, Democrats agreed to his demand to rewrite election rules. Voting at dawn to end a three-month impasse, the California Legislature approved a deal that Democrats and Gov. Arnold Schwarzenegger reached with a GOP holdout to resolve the state's fiscal emergency. Under the arrangement, Sen. Abel Maldonado of Santa Maria provided the final Republican vote needed to pass a spending plan with billions of dollars in tax hikes. In exchange, Democrats agreed to rewrite election rules that Maldonado said had allowed the Capitol to become paralyzed by partisanship, leading the state to the brink of financial ruin.

Carmakers' latest loan requests spur suspicions - (www.latimes.com) Some say GM's and Chrysler's requests for additional loans amount to a high-stakes game of chicken. Pay a lot now, or much more later. That's the choice General Motors Corp. and Chrysler presented Washington this week as they requested $22 billion in additional bailout money -- and warned that the tab could be many times that should the companies go bankrupt. Despite historic sales declines, critics contend that the automakers' arguments are simply posturing to squeeze more money out of the government and to make billion-dollar cash infusions seem more palatable. The Detroit companies' stance amounts to a high-stakes game of chicken, critics said, as President Obama risks going too far to support a deeply troubled industry or not going far enough and letting them fail at possibly huge costs to the economy and the taxpayers. GM and Chrysler said in business plans submitted to the government Tuesday that a bankruptcy filing would be costly not only in monetary terms, but also in the possible loss of hundreds of thousands of jobs -- a prospect that would be devastating to an already ravaged economy.

Thursday, February 26, 2009

Billionaire's bank customers denied their deposits - (finance.yahoo.com) Panicky depositors were turned away from Stanford International Bank and some of its Latin American affiliates Wednesday, unable to withdraw their money after U.S. regulators accused Texas financier R. Allen Stanford of perpetrating an $8 billion fraud against his companies' investors. Some customers arrived in Antigua by private jet and were driven up the lushly landscaped driveway of the bank's headquarters, only to be told that all assets have been frozen pending an investigation by Antiguan banking regulators. "I don't know what to think. I have my life savings here," said Reinaldo Pinto Ramos, 48, a Venezuelan software firm owner who flew in by chartered plane from Caracas on Wednesday with five other investors to check on their accounts. "We're waiting to see some light." Banking regulators and politicians around the region are scrambling to contain the damage after the U.S. Securities and Exchange Commission filed civil fraud charges against the billionaire on Tuesday. Regional Director Rose Romero of the SEC's Fort Worth office called it a "fraud of shocking magnitude that has spread its tentacles throughout the world." Stanford, 58, is a larger-than-life figure in the Caribbean, using his personal fortune -- estimated at $2.2 billion by Forbes magazine -- to bankroll public works and sports teams. He also is a major player in U.S. politics, personally donating nearly a million dollars, mostly to Democrats. At 6-foot-4 and 240 pounds, he towered over House Speaker Nancy Pelosi while giving her a warm hug at the Democratic National Convention last year.

Fiscal Stimulus Is a Ruse Absent Fed Pixie Dust - (Carolyn Baum at www.bloomberg.com) It’s a jobs-creation program. No, it’s investment in our future. It’s a tax-relief plan. Wait, it provides assistance to consumers hardest hit by the economic recession. It’s legislation to jump-start the economy. No, it’s a recovery program. It’s a life raft for state and local governments. It’s a spending bill. Which is it? Fiscal stimulus is all things to all people. In other words, it represents the triumph of faith over reason. When I first learned about fiscal stimulus according to John Maynard Keynes in an introductory economics course, it made a modicum of sense. The idea was that at times when the private sector isn’t pulling its weight, the government can step in and spend instead. It doesn’t take an inquiring mind very long to find the flaw in the argument. How exactly does the government get the money to pay for its spending? Neitherborrowing (today) nor taxing (tomorrow) increases aggregate demand. All they do is transfer the ability to spend from one entity to another and the timing of that spending from the future to today. In the short run, the economy will get some boost from hundreds of billions of dollars in government spending. What about the long run? (Please don’t say we’re all dead.) One dollar of federal borrowing means one dollar unavailable for the private sector.

U.S. Doubles Fannie, Freddie Backing to $400 Billion - (www.washingtonpost.com) The federal government yesterday doubled its commitment to Fannie Mae and Freddie Mac, promising to reimburse the companies for up to $400 billion in losses on their investments in mortgage loans. The massive expansion of the government backstop is a response to mounting strains on the two companies, officials said. It was announced as part of the Obama administration's broad plan to reduce foreclosures, which will further squeeze the companies' revenue by requiring the pair to refinance or modify millions of loans to lower monthly payments. And it comes as a souring economy is pushing more borrowers to default. Fannie and Freddie estimate they will need up to $65 billion from the original $200 billion backstop to cover their losses on mortgage-related investments in the second half of 2008. "It is crucial to maintain confidence in these institutions even under worse-than-expected economic conditions," Treasury Secretary Timothy F. Geithner said yesterday in a statement announcing the new aid package. The companies, both based in the Washington area, were seized by the government in September to stabilize their role as the main funding source for mortgage lending. Fannie and Freddie buy loans from originators such as banks, allowing new loans to be made before existing ones are repaid.

Madoff Loss Spawned in ‘Bargain With Devil’ at Cerberus Bank - (www.bloomberg.com) “Aozora and Shinsei were managed like many banks in America, investing in derivatives and other toxic assets,” said Neil Katkov, head of Asia research at Boston-based Celent LLC. “It was a bargain with the devil.” Buyout firms including Cerberus and J.C. Flowers & Co. are stumbling with investments from Japan to Germany as their acquisitions are battered by the credit crisis and the deepest recession since the early 1980s. As many as 50 percent of companies owned by private-equity firms may default by 2011, according to a study of 328 holdings by Boston Consulting Group. The failures are affecting a cross section of the global economy. Mervyn’s LLC, Lyondell Chemical Co. and Linens ‘n Things Inc. -- all controlled by buyout firms -- have filed for bankruptcy. Cerberus received U.S. government aid for Chrysler LLC and GMAC, the lender affiliated with General Motors Corp.

British finances deteriorating at 'alarming' rate - (finance.yahoo.com) The British government's finances deteriorated in January as tax receipts fell off a cliff, official figures showed Thursday, generating fears that finance minister Alistair Darling will be forced to increase his borrowing projections for the year in his Budget in April. The Office for National Statistics revealed that the government's surplus during the month was only 3.3 billion pounds ($4.3 billion) in January against market expectations of a near 7 billion pound surplus. January's surplus was also much lower than the equivalent 13.9 billion pounds recorded in the same month last year and came as the British economy is suffering its worst recession since the early 1980s. The government runs a deficit overall, but usually reaps a surplus in January, which is the most important tax-raising month of the year for the government as individual tax receipts from the self-employed combine with quarterly payments from businesses. The surplus recorded this January was the lowest since 1995. "The public finances continue to deteriorate at an alarming rate," said Andrew Goodwin, senior economic advisor to the Ernst & Young ITEM Club, which uses the same forecasting model as the British Treasury.

Auto bailout tab could top $130 billion - (money.cnn.com) GM and Chrysler say they need $21.6 billion more in loans. But that won't be enough to save Detroit. Here's a rundown of all the auto bailout proposals. General Motors and Chrysler LLC asked the government Tuesday for $21.6 billion in additional loans, but the final cost of a bailout of the auto industry could be significantly higher. The two struggling auto giants have already received a total of $17.4 billion in loans. If they get the new loans they want, the price tag of the bailout would climb to $39 billion. What's more, $7.5 billion in loans have already been approved for the financing arms of GM and Chrysler. Congress also approved funding last year for $25 billion in loans to help automakers convert their plants to produce more fuel efficient cars. But dealers and suppliers are also asking for federal aid. And consumers may eventually get further incentives from the government to buy new cars.

Commercial real estate's crisis point approaching? - (www.signonsandiego.com) With credit markets still shaky, about $171 billion in loans backed by offices, shopping centers, hotels and other commercial buildings are coming due this year. Experts increasingly wonder whether there's enough credit capacity in the system to refinance them. Yesterday, at a conference sponsored by the Burnham-Moores Center for Real Estate at the University of San Diego, bankers and real estate experts tried to tackle the crucial questions facing the market. Two of them were: When will the credit freeze thaw, and what can commercial landlords expect when dealing with lenders? The overall message was that it's too soon to know. Too much uncertainty remains over the direction of the economy and federal efforts to shore it up. For months, experts have been saying commercial buildings will be the next shoe to drop in a real estate-led downturn that began with toxic subprime home loans and has spread to every sector of the economy. One reason for concern is that the market for commercial-mortgage-backed securities – bondlike investments backed by bundled commercial mortgages – has all but dried up. Such securities accounted for about half of commercial real estate loans during the boom years of 2006 and 2007. If landlords can't refinance, it could lead to distress sales as they're forced to get rid of their buildings or face foreclosure – further driving down values of real estate assets – many of which are secured by mortgages held by banks.

Lower the Rent or Else - (Mish at globaleconomicanalysis.blogspot.com) If you are stuck in a lease on bad terms, you might consider what Pier 1 Imports is doing: issue an ultimatum and threaten to leave. CoStar is discussing howRetailers Pressure Landlords Publicly for Rent Cuts, With Varying Results. Faced with a deepening recession and declining shopper spending, retail chains are increasingly exerting public pressure on landlords to renegotiate leases to achieve rent cuts and other concessions, warning they could be forced to join the growing list of retailers closing stores unless their contracts are amended. For example, Pier 1 Imports, Inc. (PIR) on Feb. 3 announced a plan it described as designed to "meet the challenges of the current environment and to position itself for optimum performance in a post-recession economy." The furniture and home accessories retailer said it has already begun, via the services of Melville, NY-based DJM Realty, to open talks with landlords to "achieve rental reductions across the chain." The company then warned that if such rental reduction negotiations were unsuccessful, it would terminate the leases of up to 125 stores. [My Comment: Pier 1 Imports is sitting on about $117 million in cash and is burning up that cash at a rate of about $31 million per quarter. Its share price is 32 cents. I doubt Pier 1 survives the year no matter how much lower it negotiates is leases.] Pier 1 isn’t alone. Following is just a sampling of retailers that have made their lease renegotiation efforts public, along with some commentary from retailers and their landlords -- and their property disposition, tenant rep and lease restructuing specialists -- on the degree of success they’ve have had in reducing occupancy costs. GAP: Gap isn't just trying to reduce rent paid for its stores, it's trying to do so by reducing its store square footage by 10% to 15%, which also results in additional vacant space for landlords. In its most recent quarterly conference call with analysts, Gap Chairman and CEO Glenn Murphy, commented on the casual apparel retailer's progress in negotiating with landlords.

Wednesday, February 25, 2009

No Doubt: The Worst is Yet to Come – (Frank Barbera on www.financialsense.com) Over the weekend, ‘60 Minutes’ did a lengthy piece on the “Buy American” clause which the Obama Administration at one point seemed likely to be including in the forthcoming stimulus package. Originally, the language in the bill stipulated that government funded projects use only US-made materials (steel etc.). Across the US, Labor Unions have understandably wanted the strong ‘Buy America’ provision, while companies with large-scale exports have opposed the initiative. During his campaign, Obama ads which ran in widely ‘labor-heavy’ states used the slogan, “Buy American, Vote Obama”. In viewing the 60 Minutes report, it was easy to see both points of view, with a senior executive at Nucor arguing that Chinese dumping of cheap steel is costing American jobs, counter-pointed by the CEO of Caterpillar who suggested that this kind of language could open the door to new found Trade Wars with other countries viewing the language as a move toward protectionism by the United States. To that end, President Obama seems to be coming to the conclusion that risking this kind of bearish signal is simply too high a gamble and has now opted to settle on a middle of the road, watered down version in which the Buy American language only requires that the government spend funds in ways that which do not violate U.S. trade agreements. When interviewed, President Obama said that his change was prompted by concerns that tough ‘Buy American’ requirements could spark international trade wars. Speaking with ABC News, Obama stated that he was against provisions that ‘signal protectionism’ stating, “I think that would be a mistake right now. That is a potential source of trade wars that we can’t afford at a time when trade is sinking all across the globe, -- a downward protectionist spiral could be very dangerous.”

Court Blasts Through Foreclosure Cases - (online.wsj.com) To clear a huge backlog of foreclosures, Florida judges are hearing "rocket dockets" of nearly 1,000 cases a day. Hoping to save her house, Saundra Hill Scott arrived at the county courthouse clutching dog-eared mortgage bills and letters from her lender. See photos and hear audio clips from the Lee County Courthouse and Ms. Hill Scott's home. She need not have bothered. The foreclosure hearing lasted less than 20 seconds, with Judge John Carlin asking her two questions: Are you current on your mortgage and are you living in the home? She answered no and yes and then offered to show him her paperwork. "I don't need to see that. That's between you and the bank," he said as he gave Ms. Hill Scott, her husband and three grandchildren 60 days to work out a deal with their lender or vacate their three-bedroom house. While the Obama administration prepares to unveil on Wednesday its plan to rescue the U.S. housing market, officials here in Lee County have come up with their own unique plan for dealing with the crisis. To clear a huge backlog of foreclosures, judges are hearing "rocket dockets" of nearly 1,000 cases a day and calling retired colleagues back to the bench to help ease the workload. The housing crisis has been pounding the Florida court system like a Category 5 hurricane. Not only does the state have among the highest default rates in the country, its legal system, unlike many other states with devastated housing markets, requires judges to sign off on foreclosures. The combination has created a monster glut of cases that are overwhelming the courts. The Obama plan to encourage more loan modifications nationally may stem the flood of foreclosures in Florida somewhat, but Lee County officials say that the area's large number of unemployed residents and housing speculators may end up losing their properties anyway.

Goldman Sachs Partners Forced to Borrow to Cover Margin Calls - (www.cnbc.com) Tough times on Wall Street are reaching all the way to the highest levels of the most storied former investment bank—Goldman Sachs—as partners there are being forced to borrow money to cover margin calls, according to sources within the firm. Several Goldman Sachs partners have leveraged their Goldman Sachs stock to buy alternative investments such as hedge funds & private equity, and they have done so through their Goldman Sachs brokerage accounts. But Goldman stock has declined in value by more than 50 percent since last spring, meaning that Goldman Sachs is in the awkward position of making margin calls on its own partners, who can't meet those calls because their alternative investments are underwater and they don't have enough cash on hand. Now those partners are being forced to borrow money—millions of dollars—to meet Goldman Sachs' own margin calls. Sources at Goldman told CNBC that the borrowing is not a widespread phenomenon. It affects a "few" partners, sources say. But it is significant enough that the firm is arranging for its own financial advising firm to help facilitate borrowing for partners that need the money. Buying stock on margin—basically on credit—is inherently risky. When markets turn down and stock values fall, the people who offer that credit call their clients, needing more cash to make up the lost value. These "margin calls" are a classic sign of bad times in the market all the way back to the depression, and now they're back, big time.

Stanford Financial Chief Tried to Flee Country: Source - (www.cnbc.com) The head of Stanford Financial Group charged with orchestrating an $8 billion fraud tried Tuesday to get a one-way flight out of the country, a source told CNBC. R. Allen Stanford tried to arrange the direct flight to Antigua, where his offshore banking operations are based. He contacted a private jet owner at 3 pm and attempted to pay for the flight with a credit card, but was refused because the company would only accept a wire transfer, a source in the private jet industry said. Stanford had asked to leave by 6 pm. The Securities and Exchange Commission charged Stanford with an $8 billion fraud in which he allegedly lured investors with promises of high returns on certificates of deposit. Instead, he put the money in "black boxes" with hard-to-trade assets, the SEC said. Of the money Stanford allegedly swindled, as much as $1.5 billion belonged to US investors, who recouped most of their investments through redemptions that began to pour in following the Bernie Madoff Ponzi scheme, CNBC reported.

Stanford Attorney’s Withdrawal ‘Screams Fraud,” Spurred SEC - (www.bloomberg.com) As R. Allen Stanford assured clients last week that U.S. investigators were conducting “routine examinations” of his Texas investment advisory firm, a lawyer for his company’s Antigua affiliate was backing out. Stanford, the 58-year-old billionaire now accused of running a “massive, ongoing fraud,” spent his final weeks at the firm struggling to soothe clients while disregarding subpoenas that sought to account for almost $8 billion of their money, according to a lawsuit filed yesterday by the Securities and Exchange Commission. Regulators pounced days after a lawyer at the Antigua bank at the heart of the case “disaffirmed” everything he had told authorities. “The attorney’s withdrawal is a massive red flag” that “screams fraud,” said Peter Henning, who teaches criminal and securities law at Wayne State University in Detroit. “If the SEC hadn’t turned up the heat by that point, it did then.” The SEC’s civil suit accused Antigua-based Stanford International Bank of touting “improbable, if not impossible” returns while selling certificates of deposits to investors for more than a decade. A federal judge in Dallas agreed to freeze assets and appoint a receiver to account for the roughly $8 billion investors spent on the CDs, according to the SEC. The attorney who stepped down was Thomas Sjoblom at Proskauer Rose LLP in Washington, according to a person familiar with the matter. Sjoblom declined to comment. Stanford spokesman Brian Bertsch referred questions to the regulator.

Pickens Reduces Energy Investments, Holdings Fall 97% - (www.bloomberg.com) T. Boone Pickens, the billionaire hedge-fund manager who forecasts oil will more than double in the next 10 months after being driven down by the global recession, shed energy-related shares as their value declined, a public filing showed today. Pickens, who held 26 energy companies in his BP Capital Management LP fund as of a Nov. 14 filing, had nine according to a filing made today. As Pickens sold positions, the worth of the holdings in the fund tumbled 97 percent during the final three months of 2008 to $40 million from $1.29 billion on Sept. 30, a comparison of the filings showed. “It looks like a big commodity dump,” said Gianna Bern, president of Flossmoor, Illinois-based Brookshire Advisory & Research Inc., an energy research and consulting firm. “Crude oil will not come back until we see a global economic turnaround,” she said. Some smaller clients of oil services companies Halliburton Co. and Schlumberger Ltd., both based in Houston, are finding it hard to raise financing for projects because of the credit crunch, Bern said.

Greenspan backs bank nationalisation - (www.ft.com) The US government may have to nationalise some banks on a temporary basis to fix the financial system and restore the flow of credit, Alan Greenspan, the former Federal Reserve chairman, has told the Financial Times. In an interview, Mr Greenspan, who for decades was regarded as the high priest of laisser-faire capitalism, said nationalisation could be the least bad option left for policymakers. ”It may be necessary to temporarily nationalise some banks in order to facilitate a swift and orderly restructuring,” he said. “I understand that once in a hundred years this is what you do.” Mr Greenspan’s comments capped a frenetic day in which policymakers across the political spectrum appeared to be moving towards accepting some form of bank nationalisation. “We should be focusing on what works,” Lindsey Graham, a Republican senator from South Carolina, told the FT. “We cannot keep pouring good money after bad.” He added, “If nationalisation is what works, then we should do it.”

California Foreclosure Epicenter Shows Challenge Facing Obama - (www.bloomberg.com) It has taken Susan Erb just three years to see the value of her Merced, California, home plunge by more than half to $350,000. Next month, her mortgage payment jumps 20 percent to $3,321 and she knows she can’t afford it. Her bank won’t rework the loan unless she stops paying altogether. “Now I know how people feel when I go knocking on their door,” said Erb, 53, a real estate agent who works for a company that notifies residents in foreclosed properties that they must vacate. “I’m in their shoes.” Merced, the epicenter of the U.S. foreclosure crisis, demonstrates the steep challenges President Barack Obama will face in trying to stem defaults. One in 59 housing units in the Merced metropolitan area received a foreclosure filing in January, the highest rate in the U.S., according to RealtyTrac Inc., an Irvine, California-based seller of default data. For- sale signs are everywhere and a building boom fueled by subprime mortgages has been brought to a standstill. Just 16 construction permits were issued last year. In 2005, there were 1,427. “We’re ground zero,” said Merced Mayor Ellie Wooten, 75. The city, population 81,000, had an unemployment rate of 15.5 percent in December, “and it’s going to get worse,” she said.

CB Richard Ellis Diversified -- at a Debt-Heavy Cost - (online.wsj.com) Purchase of Property Manager Trammell Crow Is Paying Off in Slump, but the Borrowing Burden Is Taking a Toll. But the Trammell Crow deal also raised CB's debt load from about $800 million in 2005 to $2.2 billion a year later. That is becoming a burden as the company's revenue from its brokerage and leasing businesses declines. Analysts have grown concerned that CB could breach the covenants on some of its loans, forcing it into technical default and putting it at the mercy of lenders. Last week, credit-ratings firm Moody's Investors Service downgraded CB debt. Unlike real-estate-owning companies, brokerage firms don't have a bedrock of leasing revenue they can rely on when market activity slows. Before 2008, their biggest sources of revenue were fees from brokering leases and sales of buildings. In the fourth quarter, CB saw the revenue from those two activities drop 28% and 65%, respectively, from the same period in 2007. Total revenue was off 30%. But the property-management business is growing. That business, which lets other companies cut costs by outsourcing the management of the buildings they own to CB, jumped from being the third-biggest revenue generator for the company in 2007 to the top of the list last year, bringing in $1.7 billion in 2008.